Know The System is a bipartisan organization dedicated to elevating public understanding and public dialogue, to take democracy in the United States to the next level.

Scene 37: Lou and the Federal Reserve

In which Lou Rossini watches an educational movie as a detour from an economic simulation game.

Citizens need to understand Economics, and new non-boring methods—including interactive movies and simulations—will make it possible to understand this complex topic.

Martinez pressed his case to Galtier, the Fed vice president. "Now is the right time. The Chinese are going to take away more of our industry if we don't start investing. And our factories are losing their technical edge. Los Angeles is suffering, the whole region."

Galtier nodded gravely. "I know. It's a dilemma. You know I support you. But how much difference is a percentage point change in the interest rate going to make… really?"

Martinez replied enthusiastically, "A huge difference! Our companies are just waiting! They'll be able to restructure, and to put money back into R&D. They just can't – their boards are worried about the current corporate debt levels. But believe me, those boards also want to move… they're just waiting!"

The scene dissolved back into the committee meeting, with Galtier looking down at the table, brow furrowed, recalling the conversation with Martinez, only half-conscious of the debate going on in the conference room. Martinez had consistently shown loyalty to Galtier, and was an important industrialist in his own right.

"Mr. Galtier?"

Galtier snapped to attention. "Yes."

The Fed Chairman looked expectantly at Galtier. "What is your view?"

"Well," began Galtier, pausing for effect. "I do think there is a lot of waiting going on out there. But I think if we're aggressive in lowering rates, we'll see a lot of productive investment."

Smith couldn't restrain herself. "Come on, Galtier, you're not buying into their story, too, are you? No one's going to invest right now. They're just going to stockpile assets!"

Lou was struggling to stay interested. He reflected, though, that this wasn't a bad treatment of a horribly technical subject.

He had been enticed into this educational movie about the Federal Reserve bank by discussions on the Scientoologists' site—and, of course, he had scrutinized the movie's ratings himself. The whole topic appealed to him mainly because he surmised that the "real" power in the world was in the financial system, and the Fed seemed to be at the center of it all. As he watched, though, his suspicion grew that there might not actually be much drama at the center.

The movie was education, and not entertainment, and so it included intermittent offers to explain some of the background about the money supply and interest rates and bond markets and et cetera. Lou had watched a rather helpful animation about credit, and how the Fed regulated its supply (kind of like a valve regulating water pressure in an interconnected system of pipes), and how big corporations decided whether to expand. The movie itself dramatized real leaders trying to make real decisions based on those same factors.

But Lou sensed that he had already obtained most of the low-hanging fruit from this brief sojourn. He decided to return to the simulation game that had originally prompted all of this exploration. No regrets at all about the detour, though. Perhaps he'd even post a Scientoologists review later.

The simulation game was a multi-player competition to run the US economy over a fifty-year period, and to try to get the highest economic growth over that period. You could control the Fed, and all of the federal budget, and various agencies, and taxes, and you could put parts of the decision-making "on automatic" by picking fixed policies.

He and Izzy had decided to team up, though that didn't require them to make every little decision together. There were hundreds of thousands of students playing it nationwide, but the competition was grouped by state (they went with Izzy's state.) And it was more of a "rolling" competition rather than a one-shot thing.

Lou hypothesized that he might be able to leverage his new-found insights into the Fed's decision-making. Maybe there was a way in the simulation to see how lower interest rates would affect specific industries? He poked around a bit, and discovered a tool that provided just such analysis. (Was that tool there before?)

As he played around with it, he realized that he and Izzy had made rather poor decisions about interest rates in the prior year. He was about to ping Izzy, but then decided to just voice message. "Hi. We have to back up a couple years."

As it happened, Izzy saw the message immediately, and pinged Lou a few seconds later. "Hey, how come?" Backing up the simulation to "re-do" a time period was allowed only three times. Plus, it was additional work to go through the same time period again.

Lou explained what he had learned. Izzy was not easily convinced. After a brief exchange, they agreed to discuss further that evening.

ANALYSIS

Macroeconomics is hard for anyone to understand, and different people will always have different capacities for learning about it. But financial news is frequently in the spotlight, and most of us feel rather mystified or even alienated when we hear about it. One frequent story is, "will the central bank tighten/loosen, and when, and is the chairman or chairwoman is being wise and fair, or not?" Could anything be more uninteresting?

It's because the theory of it never gets explained simply and vividly. Even though it could be.

No one denies that economics is important—it is often argued, in fact, that it underpins absolutely everything. However, politicians' credit-taking notwithstanding, government doesn't really have that much control over it. In countries with a proper legal framework for business, the private sector has its own motor.

That, in fact, would be one of the greatest benefits of a widespread understanding of economics: that it will eliminate so much public noise and disinformation about it. Strong public skepticism of brazen economic claims could force politicians to worry about ridicule or even electoral punishment. Which then would leave more time, space, and attention to real problem-solving debate.

The starting point is to recognize that economics consists of deep motive forces that take decades to play out. The short-term stock market fluctuations dominating the news are driven by "animal spirits," and by world news. Not so much by tax code tweaks, nor by new (or reduced) regulations, and not much even by Federal Reserve policy.

Understanding this can be achieved by experiencing and participating in comprehensible, multi-decade-long stories. Making them comprehensible, though, requires additional tricks because the subject-matter is so remote from everyday experience.